SOLUTION MANUAL FOR
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j Principles Of Auditing And Other Assurance Services
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23rd Edition By Ray Whittington Kurt
j j j j j j
ALL Chapters (1 - 21)
j j j j
, Table of Contents
j j
Chapterj1:jThejRolejofjthejPublicjAccountantjinjthejAmericanEconomy
Chapterj2:jProfessionaljStandards
Chapterj3:jProfessionaljEthics
Chapterj4:jLegaljLiabilityjofjCPAs
Chapterj5:jAuditjEvidencejandjDocumentation
Chapterj6:jAuditjPlanning,jUnderstandingjthejClient,jAssessingRisks,jandjResponding
Chapterj7:jInternaljControl
Chapterj8:jConsiderationjofjInternaljControljinjanjInformationTechnologyjEnvironment
Chapterj9:jAuditjSampling
Chapterj10:jCashjandjFinancialjInvestments
Chapterj11:jAccountsjReceivable,jNotesjReceivable,jandRevenue
Chapterj12:jInventoriesjandjCostjofjGoodsjSold
Chapterj13:jProperty,jPlant,jandjEquipment:jDepreciationjandDepletion
Chapterj14:jAccountsjPayablejandjOtherjLiabilities
Chapterj15:jDebtjandjEquityjCapital
Chapterj16:jAuditingjOperationsjandjCompletingjthejAudit
Chapterj17:jAuditors’jReports
Chapterj18:jIntegratedjAuditsjofjPublicjCompanies
Chapterj19:jAdditionaljAssurancejServices:jHistoricaljFinancialInformation
Chapterj20:jAdditionaljAssurancejServices:jOtherjInformation
Chapterj21:jInternal,jOperational,jandjCompliancejAuditing
,CHAPTER 1 j
The Role of the Publi
j j j j
c Accountant in the
j j j
American Economy j
ReviewjQuestions
1-1 Thej―crisisjofjcredibility‖jlargelyjarosejfromjthejnumberjofjcompaniesjthatjrestatedjtheirjpreviouslyjissuedjfin
ancialjstatementsjasjajresultjofj accountingjirregularitiesjandjfraud.j Especiallyjresponsiblejwerejthejveryjvisibl
ejEnronjandjWorldComjfraudjcases.jBothjcompaniesj filedjforjbankruptcyjandjconstitutedjthejlargestjcompani
esjinjAmericanjhistoryjtojdojso.j Thejextentjofjthejaccountingjirregularitiesjandjfraudjbeingjinvestigatedjandjdi
sclosedjbroughtjintojquestionjthejeffectivenessjofjfinancialjstatementjaudits.j Injaddition,jthejcriminaljconvicti
onjofjArthurjAndersen,jLLP,jonejofjthejthenjBigj5jaccountingjfirms,jonjchargesjofjdestroyingjdocumentsjrelat
edjtojthejEnronjcasejbroughtjintojquestionjthejethicsjstandardsjofjthejprofession.
1-2 Assurancejservicesjarejprofessionaljservicesjthatjenhancejthejqualityjofjinformation,jorjitsjcontext,jforjdecis
ion-
making.jThejtwojtypesjare:j(a)jthosejthatjincreasejthejreliabilityjofjinformationjandj(b)jthosejthatjinvolvejpu
ttingjinformationjinjajformjorjcontextjthatjfacilitatesjdecision-making.
1-3 Ajfinancialjstatementjauditjis,jbyjfar,jthejmostjcommonjtypejofjattestjengagement.j Thejoveralljassertion,jmadej
byjmanagement,jmostjfrequentlyjisjthatjthejfinancialjstatementsjfollowjgenerallyjacceptedjaccountingjprincip
les.
1-4 Ajlargejcorporationjwithjsecuritiesjlistedjonjajstockjexchangejisjrequiredjbyjthejrulesjofjthejstockjexchangejandj
byjthejrulesjofjthejSecuritiesj andjExchangejCommissionjtojprovidejanjauditjreportj withjthejannualjfinancialjsta
tementsjfurnishedjtojitsjstockholders.j Itjalsojisjrequiredjtojengagejthejauditorsjtojprovidejanjopinionjonjitsjinte
rnaljcontrol.jApartjfromjlegaljrequirements,jhowever,jajlargejlistedjcorporationjrecognizesjthatjitjmustjmaint
ainjinvestorjconfidencejinjthejreliabilityjofjitsjfinancialjstatementsj andjinternaljcontroljoverj financialjreporting
j ifj itj isj toj continuej toj bej ablej toj securej capitaljfromjthejpublic.j Thejreportj byjaj firmjofj certifiedjpublicjaccountan
tsjaddsjcredibilityjtojthejfinancialjstatementsjpreparedjbyjthejcorporation.j Whenjajsmalljfamily-
ownedjenterprisejelectsj tojhavejanjaudit,jthejpurposejusuallyjisjtojusejthejauditors'jreportjtojsupportjanjapplicati
onj forjajbankjloan.
, 1-5 Ajreportjbyjanjindependentjpublicjaccountantjconcerningjthejfairnessjofjajcompany'sjfinancialjstatementsjisjco
mmonlyjrequiredjinjthejfollowingjsituations:
(1) Applicationjforjajbankjloan.
(2) Establishingjcreditj forjpurchasejofj merchandise,jequipment,jorjotherjassets.
(3) Reportingjoperatingjresults,jfinancialjposition,jandjcashjflowsj tojabsenteejownersj (stockholdersjorj
partners).
(4) Issuancejofjsecuritiesjbyjajcorporation.
(5) Annualjfinancialjstatementsj byjajcorporationjwithjsecuritiesj listedjonjaj stockjexchangejorjtradedjove
rjthejcounter.
(6) Salejofjanjongoingjbusiness.
(7) Terminationjofj aj partnership.
1-6 Tojaddjcredibilityjtojfinancialjstatementsj isjtojincreasejthejlikelihoodjthatjtheyjhavejbeenjpreparedjfollowingjt
hejappropriatejcriteria,jusuallyjgenerallyjacceptedjaccountingjprinciples.j Asjsuch,janjincreasejinjcredibilityjre
sultsjinjfinancialjstatementsjthatjcanjbejbelievedjandjreliedjuponjbyjthirdjparties.
1-7 Businessjriskjisj thejriskjthatjthejinvestmentjwilljbejimpairedjbecausejajcompanyjinvestedjinjisj unablejtojmeetj
itsjfinancialjobligationsjduejtojeconomicjconditionsjorjpoorjmanagementjdecisions.jInformationjriskjisjthejri
skjthatjthejinformationjusedjtojassessjbusinessjriskjisjnotjaccurate.jAuditorsjcanjdirectlyjreducejinformatio
njrisk,jbutjhavejonlyjlimitedjeffectjonjbusinessjrisk.
1-8 Atjthejbeginningjofjthejcentury,jthejprincipaljobjectivejofjauditingjwasjthejpreventionjandjdetectionjofjfraud.jA
uditjworkjcenteredjonjthejbalancejsheet,jbecausejthejincomejstatementj wasjregardedjasjhighlyjconfidentialjan
djnotj forjpublicjdisclosure.j Today,jthejprincipaljobjectivejofjauditingjisj tojformjanjopinionjonjthejfairnessjofjfi
nancialjstatementsjandjtheirjconformityjwithjgenerallyjacceptedjaccountingjprinciples.j Butjthejprofessionaljst
andardsjalsojrequirejthatjanjauditj bejdesignedjtojprovidejreasonablejassurancejofjdetectingjmaterialjmisstatem
ents,jduejtojerrorsj orjfraud.j Particularjemphasisj isj placedjonjthejincomejstatementjwhichjisjofjgreatjimportanc
ejtojinvestors.j AuditingjtodayjalsojhasjthejobjectivesjofjmeetingjthejrequirementsjofjthejSecuritiesjandjExchan
gejCommissionj(SEC)j andjthejPublicjCompanyjAccountingjOversightjBoardjforjpublicjcompanies.
1-9 Thejstatementj isjincorrect.jThejincreasingjintegratedjdatabasesjofj today,jalongjwithjavailablejauditjpro
ceduresjmakejauditedjentirejpopulationsjajpossibilityjinjmanyjsituations.
1-10 Anjoperationaljauditjattemptsj tojmeasurejthejeffectivenessjandjefficiencyjofjajspecificjunitjofjanjorganizat
ion.jItjinvolvesj morejsubjectivejjudgmentsjthanjajcompliancejauditjorjanjauditjofjfinancialjstatementsjbec
ausejthejcriteriajofjeffectivenessjandjefficiencyjofjdepartmentaljperformancejarejnotj asjclearlyjestablishedj
asjarejmanyjlawsjandjregulationsjorjgenerallyjacceptedjaccountingjprinciples.
Thejreportj preparedjafterjcompletionjofjanjoperationaljauditj isj usuallyjdirectedjtojmanagementjofjthe
jorganization jinjwhichjthejauditjworkjwasjdone.
1-11 Ajcompliancejauditjisjanjauditjtojdeterminejwhetherjfinancialjreportsjorjotherjassertionsjarejinjcompliancejwi
thjestablishedjcriteria.j Thejnecessaryjingredientsjarejverifiablejdatajandjthejexistencejofjstandardsjestablishe
djbyjanjauthoritativejbody.j Anjoperationaljaudit,jonjthejotherjhand,jisj ajreviewjofjajdepartmentjorjotherjunitjo
fjajbusinessj orjgovernmentaljorganizationjtojmeasurejthejeffectivenessjandjefficiencyjofj operations.j Internalj
auditorsjoftenjperformjoperationaljauditsjasjdojauditorsjemployedjbyjthejGovernmentjAccountabilityjOffi
cej(GAO)jofjthejfederaljgovernment.
1-12 Internaljauditorsj mustjbejindependentjofjthejdepartmentjheadsjandjotherjlinejexecutivesj whosejworkjtheyjrevi
ew.jHowever,jinternaljauditorsjarejnotjindependentjinjthejsamejsensejasjajpublicjaccountingjfirm.
j j
j Principles Of Auditing And Other Assurance Services
j j j j j j j
23rd Edition By Ray Whittington Kurt
j j j j j j
ALL Chapters (1 - 21)
j j j j
, Table of Contents
j j
Chapterj1:jThejRolejofjthejPublicjAccountantjinjthejAmericanEconomy
Chapterj2:jProfessionaljStandards
Chapterj3:jProfessionaljEthics
Chapterj4:jLegaljLiabilityjofjCPAs
Chapterj5:jAuditjEvidencejandjDocumentation
Chapterj6:jAuditjPlanning,jUnderstandingjthejClient,jAssessingRisks,jandjResponding
Chapterj7:jInternaljControl
Chapterj8:jConsiderationjofjInternaljControljinjanjInformationTechnologyjEnvironment
Chapterj9:jAuditjSampling
Chapterj10:jCashjandjFinancialjInvestments
Chapterj11:jAccountsjReceivable,jNotesjReceivable,jandRevenue
Chapterj12:jInventoriesjandjCostjofjGoodsjSold
Chapterj13:jProperty,jPlant,jandjEquipment:jDepreciationjandDepletion
Chapterj14:jAccountsjPayablejandjOtherjLiabilities
Chapterj15:jDebtjandjEquityjCapital
Chapterj16:jAuditingjOperationsjandjCompletingjthejAudit
Chapterj17:jAuditors’jReports
Chapterj18:jIntegratedjAuditsjofjPublicjCompanies
Chapterj19:jAdditionaljAssurancejServices:jHistoricaljFinancialInformation
Chapterj20:jAdditionaljAssurancejServices:jOtherjInformation
Chapterj21:jInternal,jOperational,jandjCompliancejAuditing
,CHAPTER 1 j
The Role of the Publi
j j j j
c Accountant in the
j j j
American Economy j
ReviewjQuestions
1-1 Thej―crisisjofjcredibility‖jlargelyjarosejfromjthejnumberjofjcompaniesjthatjrestatedjtheirjpreviouslyjissuedjfin
ancialjstatementsjasjajresultjofj accountingjirregularitiesjandjfraud.j Especiallyjresponsiblejwerejthejveryjvisibl
ejEnronjandjWorldComjfraudjcases.jBothjcompaniesj filedjforjbankruptcyjandjconstitutedjthejlargestjcompani
esjinjAmericanjhistoryjtojdojso.j Thejextentjofjthejaccountingjirregularitiesjandjfraudjbeingjinvestigatedjandjdi
sclosedjbroughtjintojquestionjthejeffectivenessjofjfinancialjstatementjaudits.j Injaddition,jthejcriminaljconvicti
onjofjArthurjAndersen,jLLP,jonejofjthejthenjBigj5jaccountingjfirms,jonjchargesjofjdestroyingjdocumentsjrelat
edjtojthejEnronjcasejbroughtjintojquestionjthejethicsjstandardsjofjthejprofession.
1-2 Assurancejservicesjarejprofessionaljservicesjthatjenhancejthejqualityjofjinformation,jorjitsjcontext,jforjdecis
ion-
making.jThejtwojtypesjare:j(a)jthosejthatjincreasejthejreliabilityjofjinformationjandj(b)jthosejthatjinvolvejpu
ttingjinformationjinjajformjorjcontextjthatjfacilitatesjdecision-making.
1-3 Ajfinancialjstatementjauditjis,jbyjfar,jthejmostjcommonjtypejofjattestjengagement.j Thejoveralljassertion,jmadej
byjmanagement,jmostjfrequentlyjisjthatjthejfinancialjstatementsjfollowjgenerallyjacceptedjaccountingjprincip
les.
1-4 Ajlargejcorporationjwithjsecuritiesjlistedjonjajstockjexchangejisjrequiredjbyjthejrulesjofjthejstockjexchangejandj
byjthejrulesjofjthejSecuritiesj andjExchangejCommissionjtojprovidejanjauditjreportj withjthejannualjfinancialjsta
tementsjfurnishedjtojitsjstockholders.j Itjalsojisjrequiredjtojengagejthejauditorsjtojprovidejanjopinionjonjitsjinte
rnaljcontrol.jApartjfromjlegaljrequirements,jhowever,jajlargejlistedjcorporationjrecognizesjthatjitjmustjmaint
ainjinvestorjconfidencejinjthejreliabilityjofjitsjfinancialjstatementsj andjinternaljcontroljoverj financialjreporting
j ifj itj isj toj continuej toj bej ablej toj securej capitaljfromjthejpublic.j Thejreportj byjaj firmjofj certifiedjpublicjaccountan
tsjaddsjcredibilityjtojthejfinancialjstatementsjpreparedjbyjthejcorporation.j Whenjajsmalljfamily-
ownedjenterprisejelectsj tojhavejanjaudit,jthejpurposejusuallyjisjtojusejthejauditors'jreportjtojsupportjanjapplicati
onj forjajbankjloan.
, 1-5 Ajreportjbyjanjindependentjpublicjaccountantjconcerningjthejfairnessjofjajcompany'sjfinancialjstatementsjisjco
mmonlyjrequiredjinjthejfollowingjsituations:
(1) Applicationjforjajbankjloan.
(2) Establishingjcreditj forjpurchasejofj merchandise,jequipment,jorjotherjassets.
(3) Reportingjoperatingjresults,jfinancialjposition,jandjcashjflowsj tojabsenteejownersj (stockholdersjorj
partners).
(4) Issuancejofjsecuritiesjbyjajcorporation.
(5) Annualjfinancialjstatementsj byjajcorporationjwithjsecuritiesj listedjonjaj stockjexchangejorjtradedjove
rjthejcounter.
(6) Salejofjanjongoingjbusiness.
(7) Terminationjofj aj partnership.
1-6 Tojaddjcredibilityjtojfinancialjstatementsj isjtojincreasejthejlikelihoodjthatjtheyjhavejbeenjpreparedjfollowingjt
hejappropriatejcriteria,jusuallyjgenerallyjacceptedjaccountingjprinciples.j Asjsuch,janjincreasejinjcredibilityjre
sultsjinjfinancialjstatementsjthatjcanjbejbelievedjandjreliedjuponjbyjthirdjparties.
1-7 Businessjriskjisj thejriskjthatjthejinvestmentjwilljbejimpairedjbecausejajcompanyjinvestedjinjisj unablejtojmeetj
itsjfinancialjobligationsjduejtojeconomicjconditionsjorjpoorjmanagementjdecisions.jInformationjriskjisjthejri
skjthatjthejinformationjusedjtojassessjbusinessjriskjisjnotjaccurate.jAuditorsjcanjdirectlyjreducejinformatio
njrisk,jbutjhavejonlyjlimitedjeffectjonjbusinessjrisk.
1-8 Atjthejbeginningjofjthejcentury,jthejprincipaljobjectivejofjauditingjwasjthejpreventionjandjdetectionjofjfraud.jA
uditjworkjcenteredjonjthejbalancejsheet,jbecausejthejincomejstatementj wasjregardedjasjhighlyjconfidentialjan
djnotj forjpublicjdisclosure.j Today,jthejprincipaljobjectivejofjauditingjisj tojformjanjopinionjonjthejfairnessjofjfi
nancialjstatementsjandjtheirjconformityjwithjgenerallyjacceptedjaccountingjprinciples.j Butjthejprofessionaljst
andardsjalsojrequirejthatjanjauditj bejdesignedjtojprovidejreasonablejassurancejofjdetectingjmaterialjmisstatem
ents,jduejtojerrorsj orjfraud.j Particularjemphasisj isj placedjonjthejincomejstatementjwhichjisjofjgreatjimportanc
ejtojinvestors.j AuditingjtodayjalsojhasjthejobjectivesjofjmeetingjthejrequirementsjofjthejSecuritiesjandjExchan
gejCommissionj(SEC)j andjthejPublicjCompanyjAccountingjOversightjBoardjforjpublicjcompanies.
1-9 Thejstatementj isjincorrect.jThejincreasingjintegratedjdatabasesjofj today,jalongjwithjavailablejauditjpro
ceduresjmakejauditedjentirejpopulationsjajpossibilityjinjmanyjsituations.
1-10 Anjoperationaljauditjattemptsj tojmeasurejthejeffectivenessjandjefficiencyjofjajspecificjunitjofjanjorganizat
ion.jItjinvolvesj morejsubjectivejjudgmentsjthanjajcompliancejauditjorjanjauditjofjfinancialjstatementsjbec
ausejthejcriteriajofjeffectivenessjandjefficiencyjofjdepartmentaljperformancejarejnotj asjclearlyjestablishedj
asjarejmanyjlawsjandjregulationsjorjgenerallyjacceptedjaccountingjprinciples.
Thejreportj preparedjafterjcompletionjofjanjoperationaljauditj isj usuallyjdirectedjtojmanagementjofjthe
jorganization jinjwhichjthejauditjworkjwasjdone.
1-11 Ajcompliancejauditjisjanjauditjtojdeterminejwhetherjfinancialjreportsjorjotherjassertionsjarejinjcompliancejwi
thjestablishedjcriteria.j Thejnecessaryjingredientsjarejverifiablejdatajandjthejexistencejofjstandardsjestablishe
djbyjanjauthoritativejbody.j Anjoperationaljaudit,jonjthejotherjhand,jisj ajreviewjofjajdepartmentjorjotherjunitjo
fjajbusinessj orjgovernmentaljorganizationjtojmeasurejthejeffectivenessjandjefficiencyjofj operations.j Internalj
auditorsjoftenjperformjoperationaljauditsjasjdojauditorsjemployedjbyjthejGovernmentjAccountabilityjOffi
cej(GAO)jofjthejfederaljgovernment.
1-12 Internaljauditorsj mustjbejindependentjofjthejdepartmentjheadsjandjotherjlinejexecutivesj whosejworkjtheyjrevi
ew.jHowever,jinternaljauditorsjarejnotjindependentjinjthejsamejsensejasjajpublicjaccountingjfirm.
